David Chi, Vice-President of Apache Corporation and General Manager for Apache Egypt Companies, outlines Apache’s successful 2016 performance in Egypt, their ‘fire in the belly’ attitude underlying their stellar track record of operating in Egypt, their long-term investment strategy in Egypt and his perspective of Egypt’s potential as an investment destination.
You were appointed VP and GM for Apache Egypt in May 2016, a region that represents 20 percent of the company’s overall production. What have been the highlights of the past year?
Firstly, it is an important role, so I am very grateful for the opportunity. The challenge for Apache in 2016 like our peers was how to deliver the expected performance in a challenging price environment for all stakeholders, including for our host country Egypt, which is in serious need of additional energy. I am proud that Apache Egypt was able to deliver on all performance metrics in 2016, where we managed to exceed our production goals while managing our costs.
We also wanted to redevelop and restrategize our longer-term plan for Egypt to ensure that we can continue to deliver top notch performance and to create value for all our stakeholders, as we’ve always done. Being a leading producer in Egypt means that we have to replace significant production each year, so one of our priorities last year was to continue replenishing our acreage and opportunity inventory. A very critical achievement in 2016 was winning the two Western Desert blocks, which was the first time in 12 years that we received new acreage through bid rounds in what is the core production region for us in Egypt. Based on our knowledge, these two blocks are some of the best remaining acreage in the Western Desert, and will help contribute to our ability to sustain our long-term cash flow and production.
“The challenge for Apache in 2016 like our peers was how to deliver the expected performance in a challenging price environment for all stakeholders”
Apache has historically been very successful as an E&P company in part because we are one of the leaders in 3D seismic technology. In Egypt, we have decided to invest in the latest high-resolution 3D seismic technology in order to help us in high-grading our drilling portfolio and in identifying additional opportunities in deeper formations and more complex structures. We firmly believe that this investment will pay great dividends in creating long-term shareholder value by unlocking the significant potential that remain in the Egyptian Western Desert.
We have already made a lot of infrastructure investment here so drilling is now the biggest part of our activities, even as we continue to optimize our operations. We operate across seven different basins in Egypt, east to west our activities span around 500 miles and north to south 200 miles and have generally yielded good results. In the Western Desert, for instance, Apache has a 60 percent exploration success rate.
At year-end 2016, Apache held 4.8 million gross acres in 23 separate concessions in Egypt. The past year has really been about capitalizing on Apache’s existing position of strength in Egypt to restrategize and size up new opportunities here.
How has Apache manage to deliver this stellar performance at a time where many independents have struggled with the low oil price?
On a corporate level, I am very proud to say that in 2016 Apache was the only company among our peers that did not outspend its cash, which includes dividend payment. Notably, we did not issue equity, increase debt, or cut our dividend. We were able to achieve this because we reacted faster than others and maintained capital discipline in a very challenging price environment.
In Egypt, the main question for us was, how can we continue to improve our business? Here we adopted a simple but effective approach: we analyze all our key performance indicators in all areas to identify the main performance drivers in order to optimize them. Every organization, big or small, has limited resources. We want to make sure that we focus the resources available in optimizing our most important performance drivers. Once we identified those, we formulated optimization strategies, and then we executed them.
For a business to do well, it boils down to two things: first we have to do the right things, and then we have to do those things right. To do the right things means we have to make the right decisions, and we need to focus our resources on important things. For instance, two years ago, when we were focused on optimizing opex, we first analyzed and identified key spending categories like diesel usage and production chemicals. We then followed up with the development of innovative strategies where we were able to reduce costs while improving performance. By consistently and continuously adopting this strategy, we have seen significant improvement across all areas of our operations.
The next and equally important part is to do things right, which means execution. This is where many people and organizations fail. The best plan will not get the job done if it is not executed properly.
As an organization, Apache focuses on doing the right things and doing things right. This has enabled us to deliver stellar performance despite the challenging times we are facing as an industry.
More broadly, Apache has been extremely successful in Egypt where you are now the top producer. What explains this success, particularly as Apache is competing as an independent against majors?
A large portion of our employees do come from majors. I personally worked in a major oil company before joining Apache. But what is really unique to Apache is the company’s culture, and that is really a strategic advantage that we have.
Apache is seen as a company that gets things done and moves the fastest. This stems from our mentality of doing the right things and doing things right, as I outlined, as well as what we call the Apache values, the very first of which is ‘fire in the belly’. We go out, and we get things done! I have a plan, and I will execute it! We try to hire people that can adapt to this culture. We also challenge our employees to challenge us; we do not want people to simply say the things they think we want to hear. This is why another of our values is ‘best answers win’.
Frankly speaking, nowadays the large independents like Apache can compete with majors in terms of technology. Company culture is therefore very critical in how we compete; how can we adapt and do the right thing, correctly. This is absolutely what differentiates Apache, in my opinion.
In Egypt, this has been validated by our ‘2x program’. In 1996, we were producing less than 50,000 barrels per day (BOEPD) in country. With our exploration successes and ability to expand facilities quickly, by 2005, we produced around 160,000 BOEPD – bigger than most of the major players’ production in Egypt today. The 2X Program’s aim was to double our production in five years, from 2005 to 2010, which was not an easy feat. As we continued investing and growing in Egypt, we realized there were opportunities to improve efficiency and cooperate with the host government in a more seamless way; which in combination with our technical ability and can-do culture, led to significant production growth. We promised the government that if they allowed us to do things in a more efficient way, for instance, in terms of importing the equipment and bringing expertise we required, in five years, we will double our production. Not many people believed it was achievable, doubling production from 160,000 BOEPD to more than 320,000 BOEPD in five years. But we all agreed to give it a try.
We actually more than doubled our production in less than five years, reaching over 330,000 BOEPD in mid-2010. This is a resounding testament to our efforts and gave us a lot of credibility with the government. This was achieved because we went back to our core values and company culture. Apache has proven that if we say we are going to do something, we will do it.
Looking at the 2017 capital spending plan for Apache in Egypt, how important will Egypt continue to be to Apache?
Egypt will continue to be very critical. We have increased our investment level in 2017 comparing to the prior year. And we believe our investment in country will continue to generate significant value for our shareholders and all our partners, which include our host government and SINOPEC, who owns a third of non-controlling interest in our business in Egypt.
For a company to generate value for its shareholders, it has to have the ability to make a profit and to grow. Our international assets in Egypt and the North Sea play the role of cash flow generators for the company currently, along with some of our North American assets like those in the Central Basin Platform. The goal on that front is really to sustain and grow our production. As a result, incremental capital can accomplish many things. For instance, our rig count in Egypt has increased compared to last year and this trend will continue in 2017.
In terms of growth, Apache is banking on our recent Alpine High discovery and our other Permian Basin assets in North America. Specifically with Alpine High, as one of the world’s most significant recent discoveries, it is clear that we need to allocate more capital there in order to ramp up production quickly. We are transitioning from strategic testing to optimization and development. As a result, two-thirds of Apache’s 2017 capital program is going to the Permian Basin.
We have heard that Egypt is still a rather underexplored country, contrary to the conventional view of Egypt as a mature oil and gas sector. Apache has also invested in Egypt’s first unconventional field in the Apollonia formation. Where do you see more potential: conventionals or unconventionals?
Egypt’s domestic demand is going to continue to escalate with its population growth. New discoveries like Zohr will certainly help but to really sustain the energy market, you need different players to take different slices of the pie, essentially. Conventionals should not be forgotten. We still feel we can discover more in our existing fields – just look at our December 2014 discovery in the Ptah and Berenice fields, which was acreage that we have held for two decades. We went from 0 to over 20,000 bpd in less than one year and we were able to produce at a level of 35,000 bpd in less than two years, with a total of 20 million barrels recovered already.
There are obviously many opportunities offshore but even onshore, within the deeper formations in the Western Desert, I think there is still huge potential. In particular, I believe that’s where the best opportunities for Egypt to increase oil production still remain. The Western Desert is like the Permian Basin in that there is a lot of stacked pay potential. This is what we considered great hunting ground for our explorers where we have many potential targets. This firstly lowers your risks and secondly, gives you more resources to add to your opportunity inventory. For Apache, some of these stratigraphic columns have hydrocarbon potentials from 12,000 feet thick to 25,000 feet depending on where you are.
“There are obviously many opportunities offshore but even onshore, within the deeper formations in the Western Desert, I think there is still huge potential.”
Brownfields will also play a role. Apache has a good balance: our Qarun JV is a brownfield operation – the biggest secondary recovery company in Egypt – while the Khalda JV has both significant greenfield and brownfield potential.
Unconventionals also could potentially play a role in the energy picture for Egypt. No one has really been successful in unconventionals besides North America and perhaps Argentina, but Egypt’s low cost base makes it an attractive proposition. People sometimes see unconventionals as a homogenous area where there are in fact many variations. The difficulty is for a project to be commercial and efficient. For a project to be successful, it has to go through different pilots, testing of different zones, trying different drilling and completion techniques and so on in order to thoroughly understand the field. A lot of investment is needed to understand an unconventional play – and then you have to develop it efficiently.
H.E. Prime Minister Sherif Ismail was the one who initiated the Apollonia unconventionals project while he was Minister of Petroleum, and I applaud his vision because the country does have to start somewhere. Unconventionals development takes time, and Egypt needs to start early enough to do the work right and bring production onstream in time for when it is needed. For Apache, while we do not expect to see an immediate impact from this project in the next one to two years, we recognize that our company is probably in the best position to develop unconventionals in Egypt with our expertise and track record, and we are keen to assist the country in this longer-term strategic goal.
Going back to what you said about Sinopec having a one-third share in Apache’s Egypt Region, how does this affect the company’s strategy here?
We brought Sinopec into our Egypt business as a minority partner in 2014. The key goal at the time was to demonstrate the value of our assets in Egypt and to reduce risk post revolution.
As Sinopec has a non-controlling interest, they support our decision making and operations. They have seconded employees in our organization who contribute to our success similar to Apache employees. Sinopec is one of the largest companies in the world and they provide financial and political leverage. Apache is well-known as the largest American investor in Egypt, but through Sinopec, we are also the largest Chinese investor. In addition to energy production and providing jobs, we also contribute to Egypt by acting as business ambassadors in both countries to bring in more foreign investment. For instance, a few weeks ago, I hosted the Chairman of Sinopec Group and arranged meetings for him and other Sinopec executives with H.E. the Prime Minister and H.E. the Minister of Petroleum. Egypt is interested in bringing Sinopec in as a midstream and downstream investor, and Sinopec could potentially make very significant investment in Egypt’s downstream complex, a win-win situation for everyone.
Given that Apache is so committed to Egypt, how important is CSR to Apache Egypt?
Fundamentally, we want to give where we live. Egypt has been a very important part of our portfolio for two decades, and we consider the country one of our homes. Our CSR program’s aim is not to gain a reputation, but to make where we live a better place.
We do a multitude of things in Egypt, and our flagship program is Springboard – Educating the Future, which is a non-profit organization I chair. It essentially builds schools in rural Egypt to educate underprivileged girls, who would otherwise not have been able to learn how to read and write. When Raymond Plank, our founder and ex-chairman, founded the organization, he was inspired by the fact that the girls of today are the mothers of tomorrow. If you educate a mother, you educate a family. Today, we have built more than 200 schools in rural Egypt, educated over 10,000 girls, and have 6,000 more currently enrolled. The impact of this program has been tremendous.
We try to strike a balance between meeting immediate needs and longer-term goals. For instance, we also support coed schools for Bedouins, especially in areas around our operations. We also donate medical equipment and supplies to hospitals. Last year, I attended the opening ceremony for an event recognizing Apache for the medical equipment we had donated to a hospital in Matrouh. One of them was an advanced incubator for premature babies, which was already being used that day. The doctor told me that the baby in the incubator would not have survived without it, which is incredibly moving. Ultimately, we want to see the country do well.
In light of Apache’s track record of success, can you discuss the current investment climate in the country as well as give any advice to potential companies looking to invest in Egypt?
The overall investment environment is improving. The reforms the government has implemented are extremely brave and I believe they were necessary steps to begin transforming the country. There are challenges every time a country tries to implement reforms but I think the country is doing the right things. Operating in Egypt is pretty good relatively speaking because of many reasons, its low cost base being one of them.
Egypt is becoming a land of opportunities, I would say – not just for oil and gas but industry in general. For oil and gas particularly, the Minister of Petroleum has developed a modernization strategy which will improve many aspects of the industry and with the aim to make Egypt a new energy hub. Beyond oil and gas, Egypt has a domestic market of 92 million people; easy access to key markets like Europe, the Persian Gulf and Africa, a relatively untapped continent; control of the Suez Canal; abundant energy (to come); local manufacturing workforce; a lower cost base due to the devaluation of the Egyptian Pound– there are many advantages. Companies should fully investigate this opportunity.
“Egypt is becoming a land of opportunities, I would say – not just for oil and gas but industry in general.”
Any investor that wants to do something needs to come in early. Overall, Egypt should be considered as one of the most attractive places for investment but companies do have to evaluate what is best for them.
Egypt’s international reputation as a business destination is not always positive. As an American working for an American company in Egypt, do you have a final message for the audience of Oil and Gas Financial Journal, as an American publication?
Egypt has gone through some difficult times. They are in a troubled neighborhood, let us put it that way. But I think people need to have a deeper understanding of the country instead of jumping to conclusions simply based on some of the media portrayals. Risk exists in Egypt, similar to every other country. But investors should look at a country’s long-term track record, and Egypt’s record is pretty stable.
Egypt, unlike some other countries, can be seen as a nation-state; people are patriotic and they love their country. Egyptians are very welcoming. This may not be tangible but it means that they want their country to prosper, and they are very friendly to foreigners. For instance, the recent economic reforms like the currency flotation have put additional economic pressure on the Egyptian people during this transition period. But they broadly understand that these are tough but necessary measures for the country. As I sit on the board of the American Chamber of Commerce, I meet with many local business leaders, and this is their attitude.
What is critical is whether the government and the industry leaders at the very top are on the right track and implementing good policies. The industry has been fairly stable and the overall economy has been improving; none of the oil and gas operations were really affected during the revolutions. Companies like Apache have still managed to be profitable during those times. It shows that companies can work with the system here, manage the risks and be successful.